Judgement – Assembly activity amount to manufacture

Last updated on July 24th, 2022 at 08:01 pm

Judgement – Assembly activity would amount to manufacture

ITO vs. Sudarshan R. Kharbanda (2018) (ITAT Mumbai)

 Whether:-

1. An ‘assembly’ activity amount to ‘manufacture’ for the purpose of claiming deduction u/s 80IC of the income tax Act?
2. A typographical error be a base for not allowing a deduction?

Summary

1. Where assembly of various items leads to a new item that has a different commercial identity then it can be considered as a manufacturing activity for the purpose of Section 80-IC. The minimal usage of electricity and non-usage of machinery cannot be a ground of disallowing the benefit.
2. A typographical error cannot be a base for disallowing the benefits of the various provisions of the act.

Matter as referred to in Point 1

Facts of the case 

• An assessee is situated in Parwanoo (which is notified area for claiming deduction u/s 80-IC) and is engaged in the business of manufacturing watches.
• The assessee merely purchases raw material which is just assembled to make a watch.
• The above assembling is completed by just 13 employees with very minimal electricity consumption and without using any sophisticated machinery.
• Hence, the assessee filed NIL return after considering the deduction of 80-IC of Rs. 2,03,62,738/-.

Assessment Proceedings

• The A.O rejected the claim of the assessee considering that assembly of raw material to make a watch does not amount to manufacturing activity. And with such low electricity consumption and no use of machinery, it is not possible to manufacture 8,57,826 watches.
• On appeal before the CIT(A), it was held that the assessee was eligible for deduction u/s 80-IC.
• The Revenue aggrieved by the order of the CIT(A)  went to the Tribunal(ITAT).

Analysis of the relevant Section 80-IC

• Section 80-IC(2)(ii) states that deduction shall be allowed to any undertaking or enterprise which begins to manufacture or produce any article between 7^th January 2003 and 1^st April 2012 in one or Integrated Infrastructure Development Centre or Industrial Growth Centre etc. as notified by Board, in the state of Himachal Pradesh or Uttaranchal. Refer to deduction u/s 80IC of Income Tax Act in detail

The question that is in dispute is that whether the assembly of raw material to form a watch is considered a manufacturing activity or not???

After considering the various judgements referred to by both the appellant and respondent and all the documents presented before the ITAT it was held that:-

• The product that is emerged after assembling has a different commercial identity than the raw materials. Hence, it can be considered as a manufacturing activity. Also, the various return filed by the assessee to the excise and other taxation authorities has been accepted by them. The end product is a combined effort of men and machinery. [The case has been supported by Ramit Kumar Sharma vs DIT (IT) (2009) 309 ITR 344 (AAR-New Delhi)]
• Electricity consumption is as low as it is only used for the light purpose and all the work has been done by the use of screwdrivers and there is no use of machinery.

Thus, the order of CIT(A) has been affirmed and the assessee is eligible to claim deduction u/s 80-IC of the Act.

Matter as referred to in Point 2

Facts of the case 

In the present case, the auditor by mistake reported in Form 10CCB (Audit Report) in column 25(f) that the deduction is covered u/s 80IC (2)(b)(ii), whereas it was covered u/s 80IC(2)(a)(ii).

Judgement on the case

It was held that a mere typographical error cannot be a reason for not giving an advantage to the assessee. The object of income tax administration is not to charge higher tax from the taxpayer. [The judgement referred for the same is – Sanchit Software and Solutions Pvt. Ltd vs. CIT (2012) ITR (Bom.)]

You may also like :

• Click here to read the above ITAT bench Judgement in detail 
• Refer to deduction u/s 80IC of Income Tax Act in detail

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